Four things to know about the rapidly changing housing market

Home prices are ticking up amid a sustained housing shortage, making it even more difficult for people to enter the market.  

Mortgage rates remain well above recent historic lows, and even with new homes coming on the market soon, according to recent data, experts don’t expect first-time buyers to see lower prices right away.

Home prices are moving up largely due to inventory constraints, especially at the lower end of the market, where fierce demand leads to bidding wars. The intense competition drives home prices higher — and often above what many would-be homeowners can afford.

Home prices are heating up again

After falling during the second half of 2022 amid the Federal Reserve’s bout with inflation, home prices are rising again and nearing their peak, according to a recent report from Black Knight.

Black Knight’s data showed five straight months of price gains have erased the slight drop seen last year. 

“Firming prices have now fully erased the pullback we tracked through the last half of 2022 and lifted the seasonally adjusted Black Knight [Home Price Index] to a new record high in May,” said Andy Walden, Black Knight vice president of enterprise research, in a statement. 

Walden added that figures suggest annual price growth flatlines for a “short time before inflecting and trending sharply higher in coming months.” 

Yelena Maleyev, an economist with KPMG, told The Hill housing price growth is “still a supply story, especially in the existing housing market.”

She said there are roughly half as many homes for sale as there were in 2019, and even fewer listed for $300,000 or lower. Owners who purchased homes when interest rates were near record lows are not eager to sell, Maleyev added.

“Those are getting the bidding wars,” she explained, “And that’s still going to be a problem going into the rest of the year simply because of what we’re calling this mortgage winter.”

“A majority of homeowners are locked into a sub-4 percent mortgage rate and so they’re not expected to list their homes easily unless there’s some sort of life event in which they do have to list their homes,” she added. 

Mortgage rates are staying high

Mortgage rates soared as the Fed battled inflation by raising interest rates.  

The Fed’s rate hiking cycling drastically cooled housing demand for a time as mortgage rates met already-high home prices and pushed would-be buyers to the sidelines.  

Demand rebounded as mortgage rates trended downward from their peak above 7 percent last fall in the early part of year and has remained steady even as rates have moved toward their peak in recent months. 

Average mortgage rates reached their highest level since November last week, when the 30-year fixed rate mortgage hit 6.97 percent, data from Freddie Mac showed. 

But the latest inflation data could bode well for prospective buyers. 

“Low inflation means low mortgage rates,” Lawrence Yun, chief economist at the National Association of Realtors, said in a statement. “Therefore, decelerating consumer prices could steadily lift home sales and increase home production in a few months.”

Housing costs are driving inflation

Consumer inflation figures released by the Labor Department last week showed housing costs continued to drive it.  

The consumer price index revealed the slowest annual inflation since 2021, coming in at 3 percent. This is down from 4 percent in May. 

Yet housing costs continue to prop up inflation, the data showed, fueling more than 70 percent of price growth in June. 

Maleyev explained part of housing’s sustained pressure on inflation is due to lagging data figures, noting prices seen at the end of last year are just showing up in the CPI. 

“We already have in our assumption that inflation, the housing part of inflation, will start to be stationary into the end of the year. So that’s good news,” Maleyev said.  

“We need that to help bring overall CPI down, especially at the core. The concern for inflation in general is that when housing is doing this part in disinflation the other inflation figures will start to re-inflate and re-accelerate.”

The Fed could raise rates again

The central bank paused its interest rate hikes in its last meeting in June to evaluate the impact of previous increases.  

Since then, mortgage rates have moved up close to 7 percent, while inflation has shown signs of cooling. 

Still, the Fed could continue its monetary tightening and raise rates further this year. 

Fed Governor Christopher Waller said during a speech last week he sees room for two more rate hikes this year.

“I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target. Furthermore, I believe we will need to keep policy restrictive for some time in order to have inflation settle down around our 2 percent target,” Waller said. 

George Ratiu, chief economist for Keeping Current Matters, told The Hill recent economic indicators validate the Fed’s monetary approach while showing a “soft landing” could be achieved without damaging consumer confidence and spending. 

“At next week’s FOMC meeting, the central bank’s rate-setting body could well choose to stay put and not push rates higher,” Ratiu said. 

“On the upside, with inflation showing clearer signs of moderation, the Fed seems to have some breathing room to evaluate incoming indicators for a couple of months until its next meeting in September.”